Pearlstein: ‘A Detroit bankruptcy beats a bailout’ — but what do you think?
I’m quite interested in hearing your thoughts on two questions:
- How much of your money, if any, should the government give to Detroit?
- What should we get in return ?
That is, of course, beyond the $25 billion already promised the Big Three (Medium Two?) U.S. automakers to retool their factories (in theory) to make fuel-efficient cars.
Worth noting at the start is that anyone, including the feds, could buy GM right now for about $2 billion, its current market capitalization, which is about one-third the market cap of the Dr. Pepper Snapple Group.
My biggest concern with giving them any more money is, of course, that their existing management brought this upon themselves. In particular, for years they refused to listen to those who begged them to build fuel-efficient cars — heck they ran away from the hybrid vehicle partnership they started with the Clinton administration in the mid-1990s once W. took office, ultimately giving Toyota and Honda a 10-year lead in the core drivetrain technology of the century.
Worse, if we give them more money, what is to stop them from using some of it to keep lobbying against tougher fuel economy standards and serious greenhouse gas tailpipe emissions standards. So obviously the money would have to come with serious strings attached? Indeed, I see little point in a true bailout that isn’t part of a genuine grand bargain to make a complete transition into hybrids, plug-in hybrids, and EVs, as Gore wrote.
I heard Governor Granholm of Michigan say on NPR this morning that GM had something like 17 models in development that get over 30 miles per gallon — but first off, who knows what “in development” means and second, I’m guessing she has adopted the auto industry euphemism that you can brag about the “highway” mpg of car as if that were the actual total mpg of a car. [Note to future Obama FCC: How about banning any greenwashing claims that just feature highway mpg.] And third, we need GM to have 17 models in production that get 60 overall mpg.
Granholm said that failure to save the Big 3/Medium 2 would cost the country three million jobs, but Diane Rehm and her guests demurred, since going into bankruptcy does not mean you shut down every auto related job in the country. The ever-cogent Steven Pearlstein explored all this in a recent Washington Post business column on the issue of whether the government should subsidize a GM-Chrysler merger:
… even with a government-financed merger, the companies are going to have to shrink by at least 25 percent to reflect the realities of a shrinking market and much-reduced market shares. That translates into the direct loss of an additional 40,000 jobs and the indirect loss of several hundred thousand more. There is simply no way to avoid this pain without making the company a permanent ward of the federal government.
The real flaw in the government-financed merger proposal is that it spares the companies from bankruptcy reorganization, the very process they need to get their costs and structure in line with market realities.
Only a bankruptcy court can reduce the burden of pension and health benefits to 600,000 retirees that are slated to cost the companies $90 billion over the next decade.
Only a bankruptcy court can override the state laws that make it difficult and expensive for Chrysler and GM to pare back a combined network of 10,000 dealerships, about 10 times more than Toyota has in the United States.
And only a bankruptcy court can impose on members of the United Auto Workers pay and benefit packages comparable to those paid at the nonunionized plants of foreign manufacturers that have been stealing market share from the Big Three for decades.
If the Treasury were to commit government funds without getting this kind of long-overdue restructuring, it would simply be throwing good money after bad.
But that’s not all. Taxpayers should also demand that the Treasury take the same hard line in negotiating a rescue for the automakers that it took in structuring the rescues of Fannie Mae, Freddie Mac, AIG and Bear Stearns.
Equity holders of both auto companies — including Cerberus Capital Management, the hedge fund that purchased Chrysler from Daimler with very little of its own money — should be wiped out, or at most given a small stake in the new company.
Creditors should get only 30 or 40 cents on the dollar owed – about what the debt is selling for now — plus an equity stake in the new company.
And top management of both companies should be shown the door, along with most of the directors, in recognition of their failure to deliver for shareholders and creditors.
All of these terms — the cost-cutting, the dealer restructuring, the haircuts for shareholders and creditors, the management changes — can be negotiated upfront and presented as a done deal to the bankruptcy court. Such a “prepackaged” bankruptcy would allow GM-Chrysler to run through the reorganization process in a matter of a few weeks or months without missing a payroll or a day of production. It would save as many jobs as can reasonably be saved and preserve what value is left in the companies, while giving taxpayers a reasonable chance of earning a return on their investment.
So the question is not whether many more jobs are going to be lost in the term. They are. The question is will we end up with a well-managed domestic auto industry that can prevent far larger job loss in the medium term and thrive in the long term? Will we end up with an industry that understands its only hope for the future is being part of the solution to peak oil and global warming — and that means changing its core drivetain.
I have previously explained why electricity is the only alternative fuel that can lead to energy independence and why plug-in hybrids and electric cars are a core climate solution. We need, as Obama promised, one million plug-in hybrids by 2015, and then S-curve growth after that.
Moreover, Toyota and Honda believe Hybrid production costs may drop two-thirds within 10 years, “as shipments rise and companies gain experience” — but obviously only for companies that are aggressively making the transition to hybrids.
The Detroit deal has to be not just meeting the new fuel economy standards, but meeting them increasingly with hybrids. The deal has to be multiple plug in hybrids car models. And most important, the deal has to be a new management team that is wholly committed to that
green inevitable transition, a team that will not waste a penny of the taxpayer-funded bailout lobbying against the even tougher standards and regulations that will be needed to avoid the harsh consequences of catastrophic global warming and peak oil.
The good news for Detroit is that when the country gets truly desperate on climate change — possibly within five years, but more likely closer to ten — the federal government will probably need to put a bounty out on fuel-inefficient cars to accelerate the stock turnover. That will goose auto industry sales a great deal. Unfortunately there are no commercial plug-in hybrids, let alone factories that could build them in volume, so such a strategy is not even conceivable until a second Obama term and until every major company has plug-ins across their product line.
I have doubts that such a deal can be constructed politically, but if it can be, the Obama team is the one to do it. This isn’t socialism. And it isn’t nationalization of the auto industry. It is immunization of the auto industry against the seemingly fatal disease of mental decay. (Note to self: Would that be an auto-immune disease?)
I would be interested to hear your thoughts on this thorniest of economic, energy, environmental, and political issues.